Move-up buyers drive housing recovery; millenials keep renting

Bo and Stephanie Railey, with children, Cole, 3, and Lillie, 1, recently moved into this Brownsburg home, more than twice the size of their previous house.
(Photo:
Doug McSchooler/For The Star
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After deciding to look for a larger home earlier this year, Bo and Stephanie Railey found the market was moving quickly and options were limited.

“Homes were moving so fast, you made an offer one day and the house was gone the next,” Bo Railey said.

They were faced with stark choices — spend more than they intended or delay their move. After months of losing out on offers, they decided to buy a newly built home above their price range in Brownsburg.

Move-up buyers such as the Raileys have been driving the housing recovery the past 18 months. And with that increased demand, homes in the $250,000 range are getting more difficult to find.

Expect the tight market to continue. Builders and developers are moving slowly to start new neighborhoods, partly due to higher land and construction costs, but mostly due to changing times.

Consider this: Nationally, about 72 percent of buyers in June 2014 were not first-time buyers. They were either moving up to a larger home or downsizing.

That’s nearly the opposite from a decade ago, local builders say, when first-time buyers made up close to 70 percent of the Indianapolis metro area market. So many first-time buyers were purchasing new homes in the mid-2000s that it helped drive the country’s economy, leading to the creation of construction jobs, new neighborhoods, retail centers and schools.

Since the recession ended, the culture has shifted for young Americans. During the past six years, millennials — adults in their 20s and early 30s — have been renting apartments, for both financial and lifestyle reasons, often in urban areas.

The Downtown apartment market is booming, leading to Marion County’s first residential construction boost in years. But the housing market as a whole, builders and developers say, won’t start booming again until millennials start buying.

“That generation thinks and works differently,” said Tony Barbee, Pulte’s Midwest Area president, “and maybe doesn’t have that aspiration to own a home.”

Housing market

Now, builders are targeting move-up buyers, who drove the home-building industry’s best year since the recession in 2013.

“Move-up buyers have the ability to sell their existing home and they have money for a down payment,” said Craig Jensen, area division president of Ryland Homes.

Homes in the $250,000 range, builders say, are more popular than ever, but homes that list as high as $400,000 also are finding buyers — a market that had dried up during the recession.

Hamilton County is the busiest suburban area for construction, with 1,184 permits for new homes through July, followed by Hendricks County with 430 and Johnson County with 375.

The Raileys are typical buyers. They had planned to stay in their 2,500-square-foot home for the long term when they moved in six years ago. But the house, built in 1949, is divided with lots of walls — a separate dining room, kitchen, living room and bedrooms.

When they had two children, life got a little too hectic. They moved into a $389,000, 5,500-square-foot Ryland home in Windridge Landing. It has a spacious open living area that includes the dining room, kitchen, living room and a space for the kids to play — all without inner walls.

They paid about $30,000 more than they were hoping to spend, but they couldn’t find a home in the $250,000-to-$350,000 range. Still, they had the means, and they think the investment will be worth it for their family.

“This place is so well designed for someone with little kids,” Bo Railey said.

Folks who sat through the housing downturn also have had a lot of time to think about what they want in a new house.

Owning a home with a white-picket fence in the suburbs used to be the American dream.

It’s not been a dream shared by millennials, to this point.

After peaking in the mid-2000s, homeownership for young adults is at its lowest point since 1982, the first year the U.S. Census Bureau began publishing the data in its Housing Vacancy Survey.

The reasons vary. Some millennials say they’re loaded with college debt and don’t have the money to buy a home. Some are getting started in careers that may require them to relocate frequently. Others want to live in a walkable city close to shopping, bars, restaurants, entertainment options and sporting venues.

In Downtown Indianapolis, that’s driven an unprecedented apartment-building boom with an investment totaling more than $506.8 million in the past couple of years. According to Downtown Indy, 24 residential projects with 2,913 units are underway or in planning. That will more than double the apartment housing Downtown, which has more than 5,000 units already open.

Multifamily housing, which also includes condominiums and townhomes, already was the strongest and steadiest real estate segment in the metro area following the housing crash in 2007-08.

The market is growing stronger. And rental costs are rising.

In 2009, when home building hit a decade-low rate, apartment occupancy rates began a steady climb from 89.5 percent that year to 93.3 percent in 2013, CBRE Multi-Housing Group has reported. The average monthly rent in the area also grew, from $663 in 2009 to $723 in 2013.

Kelley Jordan, 29, recently moved into an apartment along bustling Massachusetts Avenue, drawn by a flexible lease, urban lifestyle and lack of responsibility for basic maintenance and upkeep. A photographer by trade, she’s moved quite a bit: from Grand Rapids, Mich., to Paris to Oakland, Calif., to here.

Eventually, when she’s on more firm financial footing, she’d like to buy a house — but not in the suburbs. She’s thinking about a neighborhood like Fountain Square.

“I love the mobility of urban living, but I do think I’d like to buy a house eventually,” she said. “I love neighborhoods and getting to know your neighbors.”

In Marion County

Driven by the return of urban living, the Marion County housing market is up 8 percent the first six months this year — after years of decline.

Steve Lains, chief executive officer of the Builders Association of Greater Indianapolis, said for the first time that he can remember, the association has identified Marion County as an opportunity for growth.

“We’re seeing an upward trend for the first time in 15 years,” he said.

Through July, builders have filed for 485 permits in Marion County.

Micah Hill of the Redevelopment Group, which builds new homes on vacant lots in Downtown neighborhoods, said business is better than ever. He’s on pace to construct and rehabilitate about 30 homes this year for a total investment of about $7 million.

In addition to urban living, he said the rise of charter and magnet schools has helped persuade people to raise families Downtown. And the closer to the Circle, he said, the higher the demand.

And it can be expensive.

Sang Kwon, 41, a dentist, recently bought a $670,000 home in Herron-Morton Place. He and his wife love to leave their cars at home and walk or ride their bicycles along the Cultural Trail, often to restaurants or White River State Park.

“It’s really limitless,” he said. “It’s not far from our home to catch the Monon Trail. I’ve biked all the way through to Westfield.”

Trouble ahead

Even with lower interest for first-time buyers, housing demand over the next five years is likely to outpace supply. If millennials start buying, the shortage will be worse, and hit more quickly.

Pent-up demand will lead to a 49,727-lot shortage through 2019, said Edsel Charles of Tennessee-based MarketGraphics. Next year alone, he said, the Indianapolis metro area will need 5,794 lots on which to build homes.

The problem? The current lot inventory is 11,853 in 443 subdivisions.

That’s a big difference from a decade ago. In 2005, there were 24,116 lots ready to be developed in 711 subdivisions.

Demand, Charles said, will continue to drive up the price of homes.

“You need more developers with more money to start neighborhoods,” he said, “and more cities willing to zone neighborhoods that make sense.”

In the metropolitan area, builders have filed for 3,148 permits through July, only a 1 percent increase from the same period in 2013. Analysts had predicted a more robust market, potentially increasing from 5 to 10 percent.

Some buyers, especially first-time buyers, are finding difficulty in obtaining loans. Land prices are up. Building costs are up. Many suppliers and contractors went out of business during the downturn, leading to a shortage of companies to do the work. And governments have had years to tighten zoning rules to ensure they’re attracting quality products that fit their communities — a move that also lowers the margin of profit.

Instead of aggressively buying thousands of acres of farmland — a more common practice 10 years ago — Thompson has begun to develop lots he bought years ago in neighborhoods that are either unfinished or had never begun development.

“Too many variables that didn’t exist before are working to decrease the ability to provide new housing,” he said.